The M&A Playbook (Part 8): Forging the Purchase Agreement
Table of Contents
- Introduction
- Anatomy of the Purchase Agreement (Part 1)
- The "MAC" Clause: Your Ultimate Protection
- Conclusion: The Fortress Is Built (Almost)
Introduction
In Parts 5-7, you survived the Diligence Gauntlet. Your team has produced the "Red Flag Report," and you now know exactly what you are buying—the good, the bad, and the ugly.
Now, we forge the "Marriage Contract."
This is the Definitive Purchase Agreement (DPA)—which will be an Asset Purchase Agreement (APA) or a Stock Purchase Agreement (SPA), as we discussed in Part 3. This is the single source of truth for the deal. The friendly, non-binding LOI is gone. This is the 100-page, legally binding fortress that dictates every aspect of the transaction.
Your lawyers will now work to translate every risk we found in diligence into a specific protection for you.
Anatomy of the Purchase Agreement (Part 1)
A DPA is a complex document, but it is built on three key pillars:
1. Consideration & Structure
This section states the final, negotiated purchase price and its form. This is where we codify the results of our diligence. For example, the LOI may have said $100M, but after our QoE (Part 5) and legal diligence (Part 6) findings, the final price is $92M in cash at closing, plus a $5M "earnout" to be paid only if a certain new product ships.
It also definitively states the legal structure: Asset Purchase, Stock Purchase, or Triangular Merger.
2. Covenants (The "Rules for the Road")
Covenants are legally binding promises to do (or not do) something.
Pre-Closing Covenants (The most critical): These govern the seller's behavior during the "interim period" between signing the DPA and closing the deal. This period can last for weeks or months while we wait for regulatory approvals.
The #1 Covenant: The seller must "operate in the ordinary course of business".
Why this matters: This covenant preserves the value of the business you've agreed to buy. You cannot allow the seller, who now has "seller's remorse" or has mentally "checked out," to stop paying key suppliers, fire the entire sales team, sell off valuable assets, or declare a massive dividend to drain the company of cash. This covenant makes them keep the business intact until you take the keys.
Post-Closing Covenants: These are promises that survive the deal, such as the seller's agreement not to compete with you for a set number of years.
3. Closing Conditions (The Final Checklist)
This is your final "walk-away" right. This section states that the deal is not done and the money will not be wired until every single item on this checklist is complete and true.
Key conditions always include:
- The seller's shareholders have approved the deal
- All regulatory approvals (e.g., HSR antitrust clearance) have been received
- All third-party consents (from those "Change of Control" clauses we found in Part 6) are in-hand
- The seller's "Reps & Warranties" (which we'll cover in Part 9) are still true on the closing date
- The Big One: No "Material Adverse Change" (MAC)
The "MAC" Clause: Your Ultimate Protection
The "Material Adverse Change" (or MAC) clause is one of the most heavily negotiated provisions in the entire agreement.
This clause is your "panic button." It says that if something catastrophic, "unknown," and durational happens between signing and closing that fundamentally destroys the target's business, you are not required to close the deal.
The negotiation is all about the "carve-outs". The seller's lawyers will fight to exclude (carve out) as many risks as possible. They will say, "We are not responsible if the entire economy collapses," or "We are not responsible for industry-wide downturns, pandemics, natural disasters, or acts of war".
Your legal team's job is to fight these carve-outs. We will argue that a pandemic should be a MAC if it disproportionately affects the target company compared to its peers.
I must be blunt: the bar to successfully invoke a MAC clause is incredibly high. A Delaware court, in the rare Akorn case, found that a MAC had occurred, but the facts were extreme. A MAC is not a "buyer's remorse" clause. It is your ultimate, last-ditch protection against buying a company that has, quite literally, fallen apart.
Conclusion: The Fortress Is Built (Almost)
The Purchase Agreement sets the rules, the price, and the final checklist. It protects you from the seller's actions before the deal closes.
But what happens if a promise is broken? What if you discover, after closing, that the seller lied to you about a key fact?
Continue to Part 9 where we'll cover the most heavily negotiated clauses in the entire deal: the "Reps & Warranties" and "Indemnification"—the "what if you lied to me" provisions.
Previous: Part 7: The Diligence Gauntlet (Part 3 - People, Compliance, & Regulatory)
Next: Part 9: The "What If You Lied?" Clauses
